Nokian Tyres PLC (NKRKF) CEO Hille Korhonen on Q3 2018 Results - Earnings Call Transcript

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About: Nokian Tyres Plc. (NKRKF)
by: SA Transcripts

Nokian Tyres PLC (OTCPK:NKRKF) Q3 2018 Results Earnings Conference Call October 31, 2018 3:00 AM ET

Executives

Hille Korhonen - President & CEO

Päivi Antola - VP, IR & Corporate Communications

Teemu Kangas-Kärki - CFO

Analysts

Mattias Holmberg - DNB Markets

Artem Beletski - SEB

Thomas Besson - Kepler Cheuvreux

Gaetan Toulemonde - Deutsche Bank

Panu Laitinmaki - Danske Bank

Akshay Katkar - JP Morgan

Henning Cosman - HSBC

Kai Mueller - Bank of America Merrill Lynch

Ashik Kurian - Jefferies

Henrietta Seligman - Somerset Capital

Olof Cederholm - ABG

Anne Kauranen - Reuters News

Päivi Antola

Thank you, and welcome to Nokian Tyres January-September 2018 Results Conference Call. My name is Paivi Antola, and I am the Head of the Investor Relations in Nokian Tyres. And together with me in the call I have Hille Korhonen, the President and CEO of the company; and Teemu Kangas-Karki, the CFO of Nokian Tyres.

We will start the call with a brief presentation by Hille and Teemu, and then continue with the Q&A. So, Hille, please go ahead.

Hille Korhonen

Thank you, and welcome, everybody. Thank you for joining us this morning. I would like to start by summarizing our performance during the nine first months of the year. So Nokian Tyres has been performing well during the first nine months and growing in all main markets. I am particularly delighted about the strong growth we have had in North America, plus-17%, and in Russia, also plus-17% in local currencies during the first nine months, yet our financial numbers are negatively impacted by currencies.

When looking at the different business units, Passenger Car tyres has been growing both in volume and through positive price mix in comparable currencies. Heavy Tyres continues to demonstrate good growth not only in forestry, but also in agricultural segment with our new products. Vianor has been improving their profitability according to the plan.

Operating profit has improved slightly, also having impact from currencies. And as the currencies continue to have negative impact on our both net sales and EBIT, we are updating our full year guidance. And Teemu will come back to this topic later.

Let me then take a look at the market situation and the impact on our third quarter sales, as well as rest of the year. During the third quarter, we have been growing sales in Central Europe and especially in North America, but showing some decline in Nordics and Russia. And I would like to take a couple of minutes highlighting some of the key drivers behind. So first of all, in the Nordic countries, new car sales has been declining during the third quarter.

Nokian Tyres has a high market share in winter tyres, which are sold when consumers are buying new cars. And therefore, this decline had a direct impact on our sales. In Norway, almost half of the new cars are electric or hybrid, and lack of global capacity has been impacting the new car sales of both electric and hybrid cars. And the share of these cars, for example, in September was 45% of total new car sales. In Sweden, the new regulation WLTP had a big impact on new car sales, even reducing the sales by 30% in couple of month’s time. So there have been big changes in the Nordic markets, as well.

When it comes to Russia, sell-out of summer tyres has been weak due to late season, as we explained already during our last call. Our customers have high inventories of summer tyres, and this also has had an impact on winter tyre sell-in due to practically lack of warehousing space and tight credit limits. And as I stated during the second quarter call, this will also have an impact on fourth quarter sales, as we are then starting preseason deliveries of summer tyres for 2019. Our full year Russian market estimates are unchanged, so the new car sales will be improving and increasing roughly by 13% to 15%, and sell-in of car tyres will grow 3% to 5%.

Central Europe also has high summer tyre inventories after weak and delayed summer season. And when we look at the winter season, it has not yet been started, so this might have an impact on the fourth quarter sales. So timing of the winter in Central Europe has, of course, impact on our sales, as well.

So as a summary, slight decline of sales in Nordics and Russia due to these changes impacting the market. All-in-all, our underlying performance is solid, and we have been overperforming the market.

And I would like to take a short look at our most important strategic initiative, building our third factory in Tennessee. And this is key investment to support our growth in North America, and it will release capacity from our Russian factory for growth in Russia and Europe. I was visiting Dayton factory site about one month ago, and I can confirm to you that the construction works are proceeding according to the plan. So the walls are rising, and first machinery will be installed within a couple of weeks. We have recruited the first people, and they are at the moment visiting our Russian factory for training purposes, and that is very important thing for us to ensure that our efficiency and all the knowledge that we have in our factories is being transferred to the new site.

In order to support growth in Central Europe, we have been putting a lot of effort in development of new generation of summer tyres for Central Europe. Our aim is to complement our offering to our customers, although we still continue to grow in winter tyres as well. As you can see, we have changed our product naming approach to better demonstrate the benefits of our products. So, the wet-proof tyres have excellent performance in both wet and dry modes, whereas the Powerproof is for the ultra-high-performance category.

We launched these premium summer tyres for Central European market a couple of weeks ago, and they have been tested by both the Formula One champion, Mika Hakkinen, as well as German team. And our customers were very happy with the new products.

These strategic projects are some examples of the initiatives we have in place as we are implementing our strategy together with the whole Nokian Tyres team. And we continue to work in close relationship with our customers. We continue to improve our brand awareness, especially outside home markets. We will be investing in new products to support our growth. And we continue to utilize and expand our very strong competence in manufacturing.

I will now hand over to our CFO, Teemu Kangas-Karki, who will go through the numbers, and he will also present the new briefs he promised to come up with to better explain how we have been performing.

Teemu Kangas-Kärki

Thank you, Hille. If I touch some of the key figures on these slides, in the third quarter, we reached net sales of EUR 357 million. And on a comparable currency, the change is 1.2% up, comparing to the year-to-date comparable currency growth of 8.7%. The operating profit on the third quarter was on a level of EUR 86 million, down from EUR 90 million in 2017 third quarter.

Looking our cash flow from operating activities, we had a good cash flow in the first nine months, reaching the level of EUR 77 million. There we need to take into account the positive effect from return, additional taxes from the tax authorities this year, and then additional taxes paid in last year. Nevertheless, taking into account those, we have been able to improve our operating cash flow.

Capital expenditure after nine months reached a level of EUR 114 million. The projects are proceeding according to the plan. Nevertheless, the cash outflow is slightly behind what we originally thought in the beginning of the year.

Then moving to Passenger Car tyres, and there our sales, as said already earlier, with comparable currencies is up 10%. And in the third quarter, it was down with comparable currencies minus 0.7%. Year-to-date, the growth is driven by higher sales volumes and the price mix effect. The ASPs have been, with comparable currencies, slightly up. In Q3, as stated, we got negative impact from higher inventory levels in Russia and lower car sales, especially in Sweden and Norway.

If we then move to the next slide, where we can take a look to our bridge for the first nine months, there you can see on net sales the breakdown by volume, price mix, and currency. Well, the volume has been growing almost 9%, price mix about 1% up, and the negative currency about minus 6%. The impact on EBIT from currencies for the first nine months has been EUR 18 million negative. Here you can see then also the other components impacted positively total EBIT development, like volume and price mix, and then increased production costs and fixed costs to our platform.

Then turning to Heavy Tyres, where the strong growth has continued, on the third quarter, our net sales in Heavy Tyres reached a level of EUR 45 million and the operating profits almost EUR 6 million. The sales of agricultural tyres and forestry tyres increased in particular. Our growth is limited by our products and capacity at the moment. For example, in September, we reached all-time high net sales for one month. The operating profit for the first nine months has been impacted by the negative currency impact and the earlier inventory valuations, as well as the costs related to ongoing ramp-up of new production capacity.

Vianor has been able to continue on the planned track. Also in the third quarter, the third quarter net sales reached a level of EUR 68 million on a comparable currency basis, almost 3% up. And the operating profit was minus EUR 5.4 million improvement from last year third quarter. That is due to the fact that we have been focusing on the sales management, as well as improving the operational efficiency of the overall Vianor chain.

Today, we decided to update our full year guidance due to continued negative currency effect. So the current guidance is that in 2018, the net sales and operating profit are expected to be at the same level or slightly higher compared with previous year.

Päivi Antola

Good. Thank you, Teemu. Hille, anything you would like to add before we go to the Q&A?

Hille Korhonen

Thank you, Paivi. I would like to summarize that, despite of the lowered outlook due to negative currency impact, we have had very strong nine months. I am very delighted that we are proceeding in line with our plan, especially in North America, having plus-17% growth during first nine months, and that we are demonstrating solid performance also in other markets. Our strategic projects are proceeding according to the plan, and we are proceeding with all the key development initiatives as well.

Päivi Antola

Thank you, Hille. And now, we would be ready for the questions from the audience, please.

Question-and-Answer Session

Operator

[Operator Instructions]. We have a question from Mattias Holmberg. Your line is now open, sir.

Mattias Holmberg

Thank you. Mattias Holmberg from DNB here. My first question is on the inventory situation in Russia. You have been clear here that it is summer tyre inventories in particular that are on high levels with your Russian distributors. And as I understand it, Q4 is the quarter when the summer tyre sell-in normally really takes off in Russia. So was quite surprised to see that you already now in Q3 are so negatively impacted by this. So my question is really if there is anything else than summer tyres explaining the weak performance in Russia in Q3, or if we should see this as a signal that Q4 is going to be much worse, as this is the most important quarter for selling of summer tyres?

Hille Korhonen

You are right that we are selling most of the Russian summer tyres already during the fourth quarter. There is nothing particular about the Russian situation other than that it's -- physically, the inventories have been quite full. And as the winter has only now started, the sell-out from the inventories further to the distribution has not taken place earlier. So the customers have been taking in new tyres slower than they would normally do. And this is, I have to say, to my understanding, first time in 12 years that we have a situation like this. So otherwise, nothing particular.

Mattias Holmberg

So just to clarify, is it summer tyres in particular, or winter tyres as well that are impacting Russia negatively in Q3?

Hille Korhonen

It's summer tyres.

Mattias Holmberg

And just one more question. You say that you lost some market share in the Nordics. And I look in the slides here, and we've seen decline in new car sales. So first of all, is it related to the decline in new car sales? And could you also just give us some help on how much of your sales that are sort of pure replacement and how much that are tyres that are sold in relation to the sale of a new car?

Hille Korhonen

We have lost some market share in Sweden, especially in summer tyres, but not in other markets. In Finland and Norway, we have been gaining market share. What comes to the share between new car sales related winter tyres and replacement market? I don't have the numbers at the moment available for you.

Operator

Next question we received is from Artem Beletski, SEB. Your line is now open, sir.

Artem Beletski

Yes, hi. This is Artem from SEB. I would like to continue regarding what comes to Russian situation. So you discussed the inventory issues. And do you expect those ones to be sorted out this year so the market could be growing next year? And have you seen any changes relating to market conditions in Russia recently?

Hille Korhonen

So the high level of summer inventories in the distribution, it will have impact on the fourth quarter, and it will have an impact on sales during the season next year. So we would be expecting same sales in the fourth quarter 2019 if the summer sell-out is proceeding like normal during the coming season. And then, you had a question regarding?

Artem Beletski

Russian growth outlook and macro situation.

Hille Korhonen

The macro situation, so the consumer confidence has been now going slightly down. And due to the new VAT increase, that will definitely have some impact on the consumer purchasing behavior in the near-term.

Artem Beletski

Alright. And maybe one additional question from my side. What comes to your production, so I guess it has been quite substantial slowdown in Q3, has there been any sort of exceptional maintenances what you have done? And what comes to Finnish factory, do you still plan for 1 million tonne ramp-up for next year in terms of production?

Hille Korhonen

We have had normal production run rate during the third quarter this year, so no changes. And at the moment, we are recruiting people in Finland in order to be able to add to capacity of 1 million tyres next year.

Operator

Next question we received is from Thomas Besson, Kepler Cheuvreux. Your line is open, sir.

Thomas Besson

I have a couple of questions please. Firstly, I'd like you to please clarify completely the continue of the tax dispute funds that are coming back to you progressively, and to explain as well whether you plan to pay any of that cash back to your shareholder via an extraordinary dividend?

Teemu Kangas-Kärki

Right. As communicated already in Q2 report, the Tax Recipient Service Unit applied for permission to appeal in the second quarter. And we are waiting for that decision, if they will get the permission or not. So there's nothing to comment at this point regarding to the process.

Then in terms of extra dividends, that's something that it's up to the Board to decide. But so far, I haven't heard any discussions regarding this matter.

Thomas Besson

To follow-up on the topic of cash returns, can you confirm what is your net cash balance? There is no reason why your dividend for 2018 should be any lower than the dividend you paid for 2017, please?

Teemu Kangas-Kärki

I cannot comment the outlook of our dividends. But if you look back, you can see that we have been paying out growing or stable dividend in the past.

Thomas Besson

Lastly for me please. You have had quite a volatile year in terms of production and volumes, and your stock price reflects this volatility. Could you comment please on what we should expect in terms of how much production you have in Q4 versus volumes and where basically your own inventories stand at the end of Q3? So given that we finally have a winter, is it fair to assume that you may at least produce as many tyres as you will ship to tyre dealers in Q4?

Hille Korhonen

I would like to comment that. As we are selling 70% winter tyres, and season is very, very short, it means that we are producing winter and summer tyres with stable production. And in order to balance the products, and we are therefore having preorders from customers and pre-shipments, so there are no major changes in our production capacity between the quarters. And that's really driving our efficiency, as well.

Operator

Next question we received is from Gaetan Toulemonde, Deutsche Bank. Your line is open, sir.

Gaetan Toulemonde

It's Gaetan Toulemonde from Deutsche Bank. I'm a little bit lost about this inventory situation where you mention Russia. Now you mention Europe on the summer tyre. Is it something which is specific to you, or it's related to the whole industry? That's my first question.

Hille Korhonen

Well, it's specific to all industry. So when we look at our inventories in Russia at our customers, I mean, we have full visibility what our key distributors have in there. Of course, they also have inventories of other suppliers.

Gaetan Toulemonde

So that means that, if the situation is not solved in the fourth quarter, there could be a risk that the beginning of next year will be impacted as well. Is it correct?

Hille Korhonen

Yes. The logic is that we are starting preseason deliveries of summer tyres to our Russian distributors already during the fourth quarter in order to balance our capacity utilization and also in order to make sure that the goods are being then delivered on time throughout the whole Russia. And the season will be then starting in March, April. So it means that they still have the higher basic stock in place, and they are only replenishing what they need in order to service their customers during the season. So the high summer tyre inventory levels will be impacting the next Russian summer tyre season.

Gaetan Toulemonde

I think that's pretty clear. I think you were expecting that question. If I go onto Page 10 of your presentation, when you highlight the currency sensitivity or the impact on the operating result, EUR 18 million for the first nine months, ballpark, can you give us a little bit an idea about which currency impacts you the most? Is it the ruble? Is it the Swedish krona? Is it the US dollar, ballpark? And a question linked to that is that, when I look at your production costs and the fixed cost increase, can you explain why these numbers are increasing so much and absorb a big chunk of this volume effect? That's my two last questions. Thank you.

Teemu Kangas-Kärki

So this year we have had headwind from all the main currencies except US dollar, and there we have got tailwind due to the fact that we buy material in US dollars. So that USD impact offset the negative impact from other currencies.

And then, regarding the production cost and fixed cost increases, if I understood your question correctly, the fixed cost impact is done, or is coming from the investments in our platform as an example, and then the production cost is due to the -- there are several factors impacting that, like production overheads and other variables, and also the investments in our production setup.

Gaetan Toulemonde

The reason I ask the question is that I do see the volume effect on your revenues, the impact on the operating result, which is approximately 50%. But when I net it from production cost increase and fixed cost increase, it looks like that your volume effect has almost no impact on your operating result. That's the reason I raise that question.

Hille Korhonen

It's good to remember that we have also increased the share of production in Finland, and Finnish production cost is much higher than in Russia.

Operator

Next question we received is from Panu Laitinmaki, Danske Bank. Your line is now open, sir.

Panu Laitinmäki

I have two questions. First one is on the guidance revision, and the only reason you gave for that is the currencies. But the Q3 growth in local currencies was also a bit below the previous quarter. So the question is that was FX the only reason, and you didn't see any change in other factors?

And then the second question is on volumes and the outlook that you see, especially in Central Europe, which grew a bit less than in previous quarters. But we have the winter season coming, so what are kind of your expectations for Q4 and full year in Central Europe, in part as well? Thanks.

Hille Korhonen

So of course, the currencies have a big impact on our guidance and why we reiterate -- change it. Then when we look at the fourth quarter, as stated earlier, the summer tyre deliveries to Russia have not yet been started. We do not have full visibility to that level. And Central European winter has a big impact on our sales during the fourth quarter, and the winter season at the moment is delayed in Central Europe. So none of the goods are still moving in the distribution, I mean winter tyres. The weather, it has been so warm.

Panu Laitinmäki

Can I have a follow-up related to that? So even if the start is delayed, how kind of -- at what point you would say that you couldn't reach the target volume, or kind of what is the logic? Do they just purchase more at a later stage, or how does it go?

Hille Korhonen

Well, of course, we have been already delivering to our local warehouses. And when the season is starting, we are able to ship. But the timing of the season is then of course impacting the volumes.

Operator

Next question we received is from Akshay Katkar, JP Morgan. Your line is now open, sir.

Akshay Katkar

Two quick questions. First is on CapEx, which came out lower in the first 9 months at EUR 115 million versus your initial guidance of EUR 260 million. How should we be thinking about the fourth quarter on CapEx? And the second question is on Heavy Tyres. Can you please give us the breakout between inventory revaluation and costs on Heavy Tyres, please?

Teemu Kangas-Kärki

Regarding the CapEx, so as I said earlier, that all the projects are proceeding according to the plan, but the cash outflow has been lagging behind, according to our first plan. So there I'm expecting to have some shift from Q4 to Q1, most likely.

Then regarding the second question, if I understood the question correctly, the Heavy Tyres inventory valuations, which took place in the second quarter, we haven't quantified the amount.

Akshay Katkar

And ramp-up costs?

Teemu Kangas-Kärki

Ramp-up cost will have an impact to our production. Having said that, we also need to remember an additional factor, which is our strong sales growth and our ability to serve our customers. And therefore, in order to give a good service level to our customers, we cannot run our production in the most efficient way that will lower our productivity on Heavy Tyres.

Operator

Next question we received is from Henning Cosman, HSBC. Your line is now open, sir.

Henning Cosman

First question is, again, on the guidance and FX, I'm afraid. So I still don't fully understand why you attribute the guidance cut so prominently to FX, because clearly FX was less negative than it was in the first half, and then at least, according to spot rates, it's going to be again less negative in the fourth quarter. So I'd just like to fully understand why you attribute it so prominently. Does it have to do again with the split of exports being produced in ruble-denominated Russia and the fact that you've maybe exported a bit more because Russia is not going as strong as it could have? If you could just talk around that a bit more to understand the prominence of FX in your both results and guidance cut, that's my first question.

Teemu Kangas-Kärki

If we look our performance in local currencies this year, we have been proceeding well. And we don't expect to get any tailwind from the currencies in the fourth quarter, and therefore, all-in-all, taking into account the good performance in local currencies, the negative impact in the first nine months, and now expectation from currency tailwind in the fourth quarter, we base our guidance on those factors.

Henning Cosman

So that implies, in turn, that your previous guidance would have implied currency tailwinds in the fourth quarter, which you are no longer seeing, but you had budgeted on them, so that's why you have to cut now?

Teemu Kangas-Kärki

Our guidance was based on constant-currency, and that was the topic that you just raise, that was my additional comment.

Henning Cosman

On the Russian market again, as a second question if I may, I would have thought from Michelin's market data, who report Europe with and without Europe, and we always try and back out the Russian market itself. And I think also from the market data that you're suggesting, I would have thought you underperformed the market in Russia. I think there was an earlier question as well, if there's a lack of sell-in is a Nokian-specific situation, or wider market? From the market data that we're trying to infer, I would have thought the Russian market was a bit stronger than yourselves. Can you please just clarify that again?

Hille Korhonen

Well, if we look at our performance during the first nine months, we have been clearly over-performing the market in Russia. And it's good to remember that we are selling to A and B segment products, whereas the C segment is representing 50% of the market.

Henning Cosman

And then finally, also maybe a question on the bridges. I think previously we've always had a drop-through of 100% on currency. This is now the first time that the implied drop-through, so EBITDA effect over sales effect is a drop-through of 40%. Can you just confirm that that's something that we can assume, going forward? And maybe not for now but for the CMD, if you could then please also give us the H1 so we can have a consistent set of bridges to work with, going forward.

Teemu Kangas-Kärki

Yes. In Capital Markets Day, the plan is to discuss this currency impact and open that. So let's come back to that topic in a couple of weeks.

Operator

Next question we received is from Kai Mueller, Bank of America Merrill Lynch.

Kai Mueller

The first question is actually on the Finland additional units you mentioned, the 1 million units. Can you just give us an idea, instead of how big the cost differential is between manufacturing a tyre in Finland versus having an extra tyre out of your Russian facilities?

Hille Korhonen

I'm sorry, but we are not disclosing this information on that level, but it's a big difference.

Kai Mueller

And in light of that, obviously you mentioned we're coming up to the Capital Markets Day in about two weeks' time. You've been investing in the Dayton factory. The margin is obviously always the big focus point. What will be the key topics that we should be expecting to be discussed on the day?

Hille Korhonen

We will be focusing on the topics that have raised most interest, and these will be Russia and North American plan. So we will definitely also go through the factory-related topics in terms of how the project is proceeding, and also some financials.

Kai Mueller

I.e. so how the ramp-up is impacting your medium-term margin, both in Finland and in North America? Is that fair?

Hille Korhonen

Overall, yes.

Kai Mueller

And then just to follow up, I was a bit surprised of -- you mentioned obviously new car sales in Scandinavia being one of the impacts for you -- being one of the impacts for your sales weakness in the region. Understand you're mainly replacement market, how does WLTP and those factors really impact you? I'm just a bit puzzled how that actually happened.

Hille Korhonen

Okay. So in the Nordics, when you are buying a car, the cars usually have summer tyres. And as we are winter-reaching, then it means that everybody, when they are buying a new car, they buy additional winter tyres. And we have a big market there in that business.

Kai Mueller

And in theory, that should be the same in Russia. Whilst the Russian car sales market has obviously been well into the double-digit, it's really been the inventory effect that's been making this big differential between sell-ins and the car sales.

Hille Korhonen

Yes. In Russia, the bigger market driver actually is the car park, i.e. the cars that have been purchased three to four years ago, and when they are entering their next tyre replenishment cycle, so that would be the biggest portion. But of course, we are in the car dealer business there, as well.

Kai Mueller

And then just two short ones to follow-up. One is you're obviously stretched in your current capacities at the moment, and you said you can't make as high of a margin as you're trying to deliver to the customers. How long do you think that will extend into?

Hille Korhonen

That topic was related to Heavy Tyres, where we are capacity-limited, and that's why we are investing in doubling the capacity during the coming two to three years' time.

Kai Mueller

And then on a similar point, I mean, we've obviously -- the question was asked earlier, we've only seen about EUR 150 million in CapEx on this Dayton factory building in 9 months versus your target of EUR 260 million. You obviously mentioned your slide again, your production ramp some 2020. You've hired the first people. What is the risk that that might shift by a year or two, given obviously the pace of the CapEx spending that we've been seeing, which is sort of the closest we can track? Your build progress has been falling behind schedule.

Hille Korhonen

Well, I'm confident that we are proceeding in line with the plan, so we are really tracking the schedule like on a daily basis. So at the moment, I don't see any risk of moving with that project one year or so. So we will be on the schedule.

Kai Mueller

I just understand, because obviously you're probably about a quarter behind this year, if you look at the CapEx.

Hille Korhonen

Yes. In terms of the invoicing flow, that is slightly beyond. But the actual project is proceeding in line with the plan.

Operator

Next question we received is from Ashik Kurian, Jefferies. Your line is now open, sir.

Ashik Kurian

The first one is on your fourth quarter. You had replied to a question that you don't expect a big change in the production run rate in the fourth quarter from what you've been doing for rest of the year and the Finnish plan only coming online in 2019, as per your report. I mean, should we expect your production volumes to grow in fourth quarter, given that you already had good volumes in fourth quarter last year or what could I be missing?

Hille Korhonen

We have been increasing our production volumes throughout the year, so the fourth quarter will be in line with the full year increase.

Ashik Kurian

And then, the fixed cost and the production cost increase that you've shown in the bridge, how much of that is related to the ramp-up of the US plant? And also, is this the run rate we should assume for the next couple of years or is this likely to increase as this revenue -- consider that the Finnish plant would only -- or the full capacity increase will be effective only from 2019?

Teemu Kangas-Kärki

With regards to impact from US, there's no impact in this year in our numbers.

Ashik Kurian

So, effectively, the production cost and fixed cost is for EUR 125 million that you have for the first nine months? The run rate could even be higher in the upcoming years or will any of the current production costs that you have -- will any of that go away in 2019 and 2020?

Teemu Kangas-Kärki

The production cost naturally go in-hand with the volume increase. And then, relating to Dayton ramp-up, we will discuss that in the Capital Markets Day.

Ashik Kurian

Last question from me is all the other tyre makers have been flagging increasing raw material cost, and you're the only one where raw material costs are coming down. And I assume there's a limit of how you account for FX in it. So maybe if you can explain as to where did you account for the FX transaction effect on currencies within the raw material bucket? And also if there's a timing issue for 2019 as of now, are you seeing a raw material headwind as well?

Teemu Kangas-Kärki

With regards to the raw material price impact this year, there are at least three factors impacting our figures. First of all, the positive currency effect from US dollar, and then the second one is the lead time that we have fixed the prices.

Ashik Kurian

So does that imply that then it's a timing issue, and for 2019, we should see a significant raw material headwind in line with what the others are showing?

Teemu Kangas-Kärki

Correct. Correct.

Operator

[Operator Instructions]. We have a question from Henrietta Seligman, Somerset Capital. Your line is now open.

Henrietta Seligman

Hello, it's Henrietta Seligman. I had a question about prices across your different regions in the context of rising raw material prices. Have you seen any price increases this year, please?

Hille Korhonen

Well, we have been ourselves increasing prices due to currency. For example, in Sweden, we have been increasing prices in Russia. So those would be the main price increases that we have taken so far.

Henrietta Seligman

And does that fully reflect the raw material price increases? And then, secondly, are you seeing your competition also increasing prices?

Hille Korhonen

As stated earlier, we have not had any major raw material price increases this year. So roughly, on a yearly level, it has been and it will be flat. And what comes to competition, we have seen some price increases, for example, in North America.

Operator

We have a question from Olof Cederholm. Your line is now open, sir.

Olof Cederholm

Hi, it's Olof from ABG. I just had a question on margins in different regions. The margin was quite a bit weaker than expected now in Q3. And I was just wondering if the geographical mix had anything to do with it. You had a weak development in Sweden and Norway, generally high margin markets, and Russia as well. What is the margin difference between the different regions now? And if you, in the long run, would grow your US and Continental European business, making those a bigger part of the pie, would that have an impact on long-term margins? Thanks.

Teemu Kangas-Kärki

This is exactly one of the topics that I will discuss in the Capital Markets Day.

Olof Cederholm

Okay, I guess I'll wait then for that. Thank you.

Operator

We have a question from [Pierre DeMenair], MainFirst. Your line is now open, sir.

Unidentified Analyst

Just a quick one on the bridge side. Could we have please two numbers, the corresponding price mix and volume effect for Q3 only please? Thank you.

Teemu Kangas-Kärki

On net sales, the volume, as discussed, was negative, and the price mix was slightly up. And the currency was negative.

Unidentified Analyst

And regarding the EBIT?

Teemu Kangas-Kärki

Regarding the EBIT, naturally the volume was negative, and price mix was slightly positive.

Operator

We have a question from Anne Kauranen, Reuters News. Your line is now open, ma’am.

Anne Kauranen

You mentioned that your sales have been declining in the Nordics, and, in that regard you said that in Norway, almost half of new cars are electric or hybrid. I didn't quite understand. How does that affect the tyre sales? Could you please clarify that for me?

Hille Korhonen

Yes, yes, definitely. So, Norway is a Nordic country where you need to have winter tyres. And normally, when you are buying a car, it only has summer tyres. So when you buy the new car, you will need to buy additional tyres to drive during winter. And when the car sales is going down and we have high share in that business, it's naturally impacting our sales.

Anne Kauranen

Okay. But what does that have to do with the cars being electric or hybrid? Is it related?

Hille Korhonen

Yes, because there is global allocation. If you want to buy a Tesla, it will take probably more than one year to get one. So, in Norway, the market demand would be definitely much more than the car manufacturers can supply at the moment.

Anne Kauranen

Oh! Okay, now I understand. Thank you.

Hille Korhonen

Yes, you're welcome. Thank you.

Päivi Antola

I'm afraid we are running out of time, so thank you, Hille, thank you, Teemu. Thank you for all the questions from the audience. Before finishing, just as a reminder what has been mentioned already during the call, we will organize a Capital Markets Day in Helsinki on Tuesday, November 13th.

And this ends today's conference call. Thank you for participating, and have a good day.